Bartlett's Final Chapter

My last post on Bruce Bartlett'sThe New American Economy led, understandably, to a lot of discussion of supply-side economics. I'll deal with that more in future post(s) but meanwhile I'm keeping my promise to post about his last chapter. I thought it was the weakest in the book. His main point in the chapter seems to be that because of huge spending commitments in the future, "we" will need to raise taxes substantially as a % of GDP. His candidate is a VAT. What about the idea of paring those future commitments? He's given up. He writes:

I myself long opposed the VAT on money-machine grounds. [The idea that a VAT would be a money machine for government.] I changed my mind when I realized that there was no longer any hope of controlling entitlement spending before the deluge hits when the baby boomers retire; therefore, the United States now needs a money machine.

This is not inspiring stuff. Now, you might argue, "So what? Even if it's not inspiring, it's true." But without inspiration we have nothing. If the Quakers and other abolitionists had said, circa 1840, "I'm convinced that we'll never be able to get rid of slavery and so we'll just have to settle for making the slaves' rooms more comfortable," then slavery might never have been gotten rid of. As Hayek said, it was the willingness of the socialists to be radical that helped them accomplish so much of what they did. We who want a much smaller government aren't going to get it by helping build a money machine for those who are sure to find ways to spend it.

Also, although Bruce Bartlett is a good economist, I find it interesting how, in this chapter, he makes some basic economic mistakes. Is it possible that his single-minded devotion to tax increases has made him drop his critical guard against bad arguments?

What mistakes and what bad arguments? Here are the ones I noticed:

On p. 175, "Every serious budget expert who has looked at the American situation has long concluded that eventually [government] revenues are going to need to rise substantially to pay the costs of an aging society."
This is circular because Bruce would define a budget expert as "serious" if he agrees with Bruce's conclusion. What about phasing out social security and cashing out Medicare and Medicaid?

On p. 176, in discussing the danger of the large U.S. government debt to foreigners, Bruce writes, "Insofar as the budget deficit represents negative saving, it soaks up resources that would otherwise be available to finance domestic investment." True, but that would be true even if Americans were the ones that lent money to the U.S. government. Either way, domestic investment is crowded out. The contribution of foreigners is to shift the supply of savings to the U.S. and, thus, make a given deficit, and a given debt, easier to finance.

On p. 177, in discussing the VAT, he writes, "consumption taxes are less burdensome because people can choose to reduce their consumption to avoid the tax." But it's choice that makes taxes more burdensome. In other words, the more choices people have to avoid a tax, the greater is the excess burden per dollar of revenue raised. The excess burden (deadweight loss) of a tax is proportional to the elasticity (of demand or supply), and elasticity is a measure of people's ability to avoid. The least burdensome tax, per dollar of revenue raised, is the one that people have the least ability to avoid because that tax doesn't distort their decisions as much.

On Europe, on p. 183, Bruce writes, "neither are their standards of living below those of the United States. Even strenuous efforts to show that Europeans are poorer than Americans show that the differences are merely trivial." I think he's wrong here.

On p. 184, Bruce makes a case for a VAT by saying, "A number of commentators have suggested a VAT for the United States to pay for national health insurance or long-term care for the elderly. This would have the advantage of relieving the perceived regressivity of the tax by tying it to a benefit that would significantly accrue to those with low incomes."
So Bartlett has come full circle. He started advocating a VAT because he sees huge spending in the future based on current laws. Then he switches to pushing for a VAT because it will make it easier to spend even beyond what current law dictates. I can see why the dust jacket has praise for the book from Robert Reich, Jamie Galbraith, and Dean Baker.

Comments and Sharing

So the republicans are going to get into power and raise taxes despite promising not to. Then they will get booted out again.
We can temporarily fix the problem by delaying retirement benefits at an increasing rate, but only if we do so soon.

Even VAT taxes would not be enough for health care systems as they are currently structured. People will have cause for hope when voluntary systems take more of the responsibilities for the entitlements of the 20th century.

The least burdensome tax, per dollar of revenue raised, is the one that people have the least ability to avoid because that tax doesn't distort their decisions as much.

That's an interesting way to think of "burdensome." By that definition, a flat tax of $100,000 per person isn't burdensome at all, because there's no way to avoid it.

The burden of a tax should be measured by the opportunity cost of the funds that go towards the paying the tax, as well as the deadweight loss from transactions that don't occur. If I have an inelastic demand for consumption, then a VAT means that I have less money available for savings, which I also value. If I have an elastic demand for consumption, then a VAT will cause me to reduce my quantity of consumption significantly, but I can use the money I would have spent paying the VAT on additional savings.

I can sympathize with Bartlett. He might not be radical enough to be inspiring, but we have enjoyed very radical and inspiring leaders, such as Hayek in the past. Hayek wound up teaching sociology and ignored.

Sometimes people are ready to listen to a prophet and sometimes they aren't. When they are, the prophet looks like a great leader and the cause of change. When they aren't, the prophet just looks silly and the only avenue left for change is for the people to suffer from their own mistakes.

The people of Greece refused to listen to its prophets for decades and now they are paying the price. Growth in government will end in the US only when we have become Greece.

"If the Quakers and other abolitionists had said, circa 1840, "I'm convinced that we'll never be able to get rid of slavery and so we'll just have to settle for making the slaves' rooms more comfortable,""

Only half of the country was committed to slavery. Every state uses Medicare. A party was formed to end the spread of slavery. No party today wants to cut Medicare. The "small government" party expanded Medicare the last time it was in power.

The federal government spends a lot on Medicare and Social Security because that is what the majority of voters want. Bartlett recognizes this and is trying to find the best way to pay for it.

Expressed in more general terms, Mr. Bartlett's argument for a VAT isn't as plain as "we can't stop this so let's make it not as bad." It's "we can't stop this, so let's stop actively making things worse."

While "starving the beast" was a fine theory, in practice it has completely failed, and even made things worse. Lower taxes are correlated with higher spending.

The federal government spends a lot on Medicare and Social Security because that is what the majority of voters want. Bartlett recognizes this and is trying to find the best way to pay for it.

That which can't be sustained won't be.

Entitlements are not sustainable. Voters can't repeal the laws of demographics.

Politicians always increase spending when they have more revenue available. Coming up with clever ways to give them more money simply increases the magnitude of damage when the ponzi scheme collapses under its own weight.

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